The United States Should Focus on Business Services, Not Manufacturing

As President Obama tirelessly points out, the US manufacturing sector is experiencing a long-sought rebound—adding about 400,000 jobs over the past two years. This is welcome news, and it is justifiably generating headlines.

But a rebound in the manufacturing sector alone will not be enough to speed the recovery. Manufacturing is an important component of the US economy, but it accounts for about only 10 percent of employment.

Further, a Washington focus on manufacturing—such as Obama’s proposed corporate tax break for manufacturing companies, announced Wednesday—may lead policymakers to overlook significant opportunities for growth in a much larger part of the economy: the business­ services sector, which includes software, finance, architecture, and engineering services.

This sector is large, pays well, and is growing. Business services employ 25 percent of US workers, more than twice as many as the manufacturing sector. The average business-service job pays about $56,000 a year—more than 20 percent better than the average manufacturing job. And over the past 10 years, business-service employment grew by more than 20 percent, while manufacturing employment decreased by more than 20 percent.

Yet this part of the economy could be growing faster. Many business services are delivered at a distance within the United States and could be exported. America also has a comparative advantage in offering these services globally, thanks to its highly skilled workforce, and indeed it consistently runs a trade surplus in this area—in stark contrast to the large merchandise trade deficit.

However, the business-service sector significantly lags behind manufacturing when it comes to exports. Twenty percent of US manufacturing output is exported—five times more than tradable business-service output. This could and should change.

The time is ripe for such a push. A global boom in infrastructure spending over the next two decades could generate $40 trillion, according to financial analysts, as the large, fast-growing developing economies undertake the building of roads, airports, harbors, residential and commercial projects, water treatment plants, and utilities. This work will require armies of architects, engineers, project managers, and financiers—exactly the type of labor in which the United States has a comparative advantage over the rest of the world.

US firms are already helping to build this infrastructure. HOK of St. Louis and DDG of Baltimore planned the $10 billion Lavasa city development project in India, and the development firm Gale International and the architecture firm Kohn Pedersen Fox (both based in New York) collaborated on the $35 billion Songdo International Business District development in South Korea.

Yet in India, China, Brazil, Russia, Indonesia, and other countries with fast-growing economies, the deck is still stacked against foreign firms by requiring a maze of regulations and licensing procedures, commercial presence mandates, and local set-asides.

In contrast, the United States and the European Union are relatively open to services trade. We need to level the playing field.

The United States should join other developed countries in pushing assertively in the World Trade Organization (WTO) for the opening of these large and fast-growing markets to service trade. Because much of the coming infrastructure spending will involve governments (whether national, regional, or local), Washington should also encourage large and fast-growing countries to sign on to the WTO’s agreement on government procurement.

The imminent infrastructure boom presents a huge opportunity for US firms and workers. Politicians’ preoccupation with manufacturing distracts us from the hard work necessary to capitalize on this historic opportunity.